Fintech Week in Review, January 8th – January 19th, 2018

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

The Ninth Circuit Weighs in on California Law Addressing Credit Card Surcharges, Cash Discounts, and the First AmendmentThe U.S. Court of Appeals for the Ninth Circuit, in a panel opinion, affirmed the district court’s grant summary judgment in favor of plaintiff holding that a California law (Cal. Civ. Code § 1748.1(a)) violates the First Amendment as applied to the plaintiffs, by banning merchants from charging credit card surcharges while simultaneously allowing discounts for payments made in cash or by other means. The merchants argued that charging a surcharge to customers paying with a credit card is a more effective tool than offering a cash-payer discount in order to avoid the 2-3% charges the merchants must pay to run credit card transactions. The merchants also argued that the statute was a content-based restriction on commercial speech rather than an economic regulation. Following a complete First Amendment analysis, the panel concluded that Section 1748.1 restricted plaintiff’s non-misleading commercial speech and was not sufficiently narrowly drawn to protect the state’s interest in preventing consumer deception. The panel agreed with the district court that the statute violates the First Amendment as applied to the merchant plaintiffs. The panel limited the effect of the ruling to the merchants in the lawsuit, however the case could serve as precedence for other merchants. This ruling follows the Supreme Court’s decision in March 2017 to remand a New York surcharge case, Expressions Hair Design v. Schneiderman, for further First Amendment analysis. SeeItalian Colors Restaurant v. Becerra, No. 15-15873 (9th Cir. Jan. 3, 2018), opinion available here; and additional analysis available here.

CFTC and SEC Enforcement Directors Issue Joint Statement Regarding Virtual Currency Enforcement ActionsThis morning, the Enforcement Director of the U.S. Commodity Futures Trading Commission (CFTC), James McDonald, and the Enforcement Co-Directors of the U.S. Securities and Exchange Commission (SEC), Stephanie Avakian and Steven Peikin issued a joint statement addressing virtual currency enforcement actions (collectively the Agencies). This statement illustrates the federal Agencies’ shared concern that digital currencies and assets may be used as an instrument of fraud and the commitment of the Agencies to end such conduct. Joint SEC-CFTC Statement Regarding Virtual Currency Enforcement Actions

The SEC Issues Letter Taking Anti-Cryptocurrency ETF PositionThis week, the SEC’s Division of Investment Management (the Division) issued a staff letter to the Investment Company Institute and the Securities Industry and Financial Markets Association entitled Engaging on Fund Innovation and Cryptocurrency-related Holdings. The letter raises questions addressing the valuation of mutual funds and ETFs that contain cryptocurrency assets, the liquidity of such funds—which should have daily redeemability, how funds will maintain custody requirements when holding crypto assets, questions about arbitrage for ETFs, and other risks including potential manipulation. Ultimately, the letter concludes that until the questions identified within the letter can be addressed, the Division does “not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products . . . .”Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings

The Treasury Department Announces Plans to Crack Down on Virtual Currency Platforms’ AML ProgramsSigal Mandelker, the U.S. Treasury Department’s under-secretary for terrorism and financial crimes, told the Senate Banking Committee this week that the U.S. Treasury is “aggressively” pursuing virtual currency platforms that lack strong internal safeguards against money laundering. Reuters

The CFTC Files Civil Enforcement Action in New York with Claims of Engaging in Fraudulent Virtual Currency SchemeThursday, the CFTC filed a federal civil enforcement action in the U.S. District Court for the Eastern District of New York against Patrick K. McDonnell and Cabbage Tech, Corp. d/b/a Coin Drop Markets (CDM), listing claims of fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin. CFTC Director, James McDonald, stated: “This action is among the latest examples of the CFTC’s continuing commitment to act aggressively and assertively to root out fraud and bad actors involved in virtual currencies. . . . We will continue to work hard to identify and remove bad actors from these markets.” CFTC Press Release; CFTC Complaint.

The CFTC Files Civil Enforcement Action in Colorado with Claims of Engaging in a Bitcoin and Binary Options Fraud SchemeThe CFTC also filed a federal civil enforcement action in the U.S. District Court for the Eastern District of New York Thursday against Dillon Michael Dean and his company The Entrepreneurs Headquarters Limited. The Complaint charges the Defendants with engaging in a fraudulent scheme to solicit Bitcoin from the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, making Ponzi-style payments to commodity pool participants from other participants’ funds, misappropriating pool participants’ funds, and failing to register with the CFTC as a Commodity Pool Operator (CPO) and Associated Person of a CPO. CFTC Director of Enforcement, Press Release; Complaint

Texas Securities Commissioner Orders Crypto-Promoter to Halt SalesEarlier this month, the Texas Securities Commissioner entered an Emergency Cease and Desist Order to stop several investment programs operated by bitcoin and crypto-community platform, Bitconnect. The Texas Securities Commissioner took the position that the lending and staking programs were not registered or permitted to operate in Texas. Announcement on Board Website; Bitconnect Cease & Desist Order.

International Developments

South Korea Continues to Explore Limiting Domestic Trading of CryptocurrencyThe debate continues in South Korea on the position the country will take regarding regulation of cryptocurrencies. Earlier this month, the Ministry of Justice (MOJ) announced its plan to introduce a bill that would ban any cryptocurrency trading on local exchanges. But on that same day, the Presidential Office of Korea released a statement taking the position that no such consensus had been reached among government agencies and internal discussions on the issue are ongoing. See Reuters